By Aleksander Thomas. Originally published on 2012/11/26

Fear should not be underestimated as a motivating force in politics.”
(Timothy G. Ash, Professor of European Studies at University of Oxford)

The eurozone faces both economic as well as financial problems. First, there is the competitiveness crisis, which divides the eurozone’s core, the robust economies of Austria, Belgium, Germany, France, Finland, and the Netherlands from its margins. The second is the fiscal crisis, which has mostly affected Greece though Spain, Portugal and Ireland have not been spared either. Then there is the banking crisis, which hit Ireland first and has also developed into a serious threat to the Spanish economy. Both Spain and Ireland suffered from housing and real estate bubbles that were fueled by cheap credits provided by banks such as Bankia in Spain or Anglo Irish Bank. The Irish crisis began through a failure to regulate banks. In June 2005 The Economist published a list of countries with recent soaring property price inflation; Ireland’s price inflation of 192% in 1997-2005 topped the list. More troubling though the true extent of Bankia’s bad debts in Spain remains unknown. Following its revised figures for 2011, revealing a €4.3 billion hole in its balance sheet, questions have been raised about the true state of the bank’s financial health.

Despite the multiple overlapping and mutually reinforcing crises, there are good reasons to believe in the survival of the euro.

An imperfect union

The European economy is facing difficult challenges. According to the latest Eurostat report, it is shown that at least nine EU countries are in recession, having posted negative economic growth in both the first quarter of 2012 as well as the last of 2011. However, the eurozone countries have shown their determination to resolve each fragment of the crisis by intensifying cooperation and sharing decision-making powers. We have seen the creation of new continent-wide institutions and the construction of a considerable financial firewall, whose aim is to tackle the problems of debt spreading throughout the union. However, the fact is that these actions were taken only after the crisis had already hit hard.

Furthermore an economic union in the design of institutions such as The Economic and Monetary Union (EMU) and the European Central Bank (ECB) are at the core of the European crises, which we are witnessing today (the reliability of the European Central Bank will be discussed later in the article).

It is too costly to break up (even for Germany)

Germany is the only euro-zone country, which has achieved significant improvements with regards to its competitiveness. Germany, as one of the core nations of the European Union does not see the euro crisis as a big threat, contrary to the perception in the peripheral countries. Just as Europe enters a three-year mark of the debt crisis, German unemployment is at its lowest in 20 years, and moreover, it was continuously falling until Q3 2012. Nevertheless, Germany needs the euro zone as much (if not more) as the union needs Germany, as billionaire investor George Soros highlighted over the weekend during a lengthy speech in Italy.

Germany’s boost in competitiveness and exports is largely owed to the monetary union. Additionally, it keeps other euro nations from defaulting on their debts. One must remember, that much of those debts are owed to German financial institutions.

Moreover, according to one forecast by analysts at ING, a total collapse of the eurozone would result in the GDP (gross domestic product) decreasing by more than ten per cent in the course of two years across the entire EU, and in this case, in Germany as well. Not only would this be supplementary to the current crisis, it would also be the origin of a very perilous political radicalization, similar to developments in the 1920s and 30s.

A changing union

On the eve of the Euro’s introduction in 1999, there was no shortage of critics. They feared that a monetary union would face a crisis sooner or later because of the absence of a common treasury as well as the problem of “asymmetric shocks,” the imbalance between a fixed interest rate and the great diversity of the European economies.

At the end of October 2012, during the European Summit, participants agreed on the gradual formation of the banking union in 2013. Olivier Bailly, a spokesman for the European Commission, confirmed this. The Commission proposed an ambitious reform of the European system of supervision based on the recommendations made by the High-Level Group chaired by Mr Jacques de Larosière. The de Larosière Group recommended establishing a new framework for safeguarding financial stability based on two pillars: A European System of Financial Supervision (ESFS) and A European Systemic Risk Council (that would be responsible for macro-prudential oversight of the financial system). One should note that the de Larosière Group stressed the need to introduce binding cooperation and information sharing procedures between these new bodies. The ongoing establishment of a new EU supervisory system will continue to help prevent future financial crises. The Eurozone countries also agreed to establish a new eurozone-banking supervisor, the Committee of European Bank Supervisors (CEBS), which will coordinate a European Union wide forward-looking stress testing of the banking system.

The creation of the banking union (a financial firewall) is just one example of the cooperation between eurozone countries and their determination to keep the common currency (alive).


It has only taken ten years after Europe adopted a current currency before a first serious and dangerous economic and political crisis emerged. The European Union needs to create the necessary foundation – economic, financial, etc. union – to support the common currency. This will require major amendments to the treaties or even a new treaty as well as great changes to its institutional set-up. One must keep in mind that after the crisis is over, the EU will face much better economic prospects for the future.

The emphasis of crisis resolution policies so far has understandably been focused on the financial sector. The European Union’s role so far has been to coordinate stress testing of banks and to provide guidance on the restructuring of banks in harmony with state based aid rules. Financial repair has therefore been at the core crisis resolution policies so far. Looking back at the recent experience with the financial crisis, it is of key importance that the framework for European Union coordination of policy be extended and strengthened.

Moreover, one has to take into account, that the experience with the Euro crisis underlines also the powerful foundation for stronger multilateral surveillance of economic policies within the European Union.

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